Friday, 27 June 2008

Consumers Confidence: Gloomy View on Borrowing and Economy

"In June, consumers' expectations concerning Finland's economy were the gloomiest since the end of 1990.

At the same time their assessments about their own economic situation were also the most cautious since summer 1997.

Nevertheless, consumers continued to regard their own employment prospects and saving possibilities as good. June was NOT regarded a favourable time for making major purchases or for raising a loan, in particular.

In addition, inflation was predicted to continue accelerating clearly."

Let's look at some major index component :

1- Favourable time to raise a loan at present (index) :
20.4(average since 95) 42.0(max) -20.8(min) -5.8 (May) -20.8 (June)

From the index, it's very interesting to note the sharp deterioration for raising loan in June. I think its the record since the statistics started in 1995.

This is not the typical slowdown witnessed in 2003, but it's a much more serious. You wonder how the consumers, this time, will support the economy by taking huge debt.

This support has vanished. Small banks will struggle if not collapse in the year to come.

Merger and acquisition will accelerate in that area (the targeted one : Noa, Tapiola, Aktia, etc.. ). They will not survive surging funding cost and a faltering consumer loan demand at a time when the ECB cannot reduce interest rates.

2- Finland's economic situation in 12 months time :
5.2 (average) 21.7 (max) -17.0 (min) -14.3 (May) -17.0 (June)

Again the same story ,a record low for the Finnish view on the economy. Although one has to be cautious in those kind of figure.

The reality on the ground seems completely different. For example, try to book a Holiday abroad, we will see that almost all destination from any travel agency have all been booked.

Same apply for restaurants, they are all packed, people even queuing to get a place. I'm not even talking about the number of SUV appearing every day on the road (looks like a petrol at 140$ is not high enough to change people habit, or make them more "green": they are not whatever nonsense reports that are spread in the wire time to time. Commercial or Materialistic values still dominate today's world, older and more noble values are all but vanishing bit by bit...)

It might be the type of data you have at the end of the cycle, lots of contradiction , up and down, lots of confusion: signaling the end of the boom.

Have a look in the technical analysis done last February, the gloomy scenario seems to show its head, but too early to say... : consumer confidence technical analysis


Anton said...

I suppose that as long as Finnish house price don't decline, people are still going to spend on any pennies they have.

When housing price start to fall, the perceived wealth deterioration will start to have an impact on the consumption thus accelerating the slump.

I expect that to happen end of this year or beginning of 2009 and this until 2011-2012 as previous cycles have shown.


Worried said...

Seems in Helsinki area house prices already falling. Or lets say prices now becoming more realistic. Quite a few marked down prices if you follow it week to week. That house in Konala that was highlighted here in April? or was it november at over 500 is now on at 420.

Meanwhile dispite all the bad news Dr Doom gets the last laugth!

Funny because as i walked into Helsinki centre this morning all i could feel was a real sense of dread.

We now seem to be in the middle of it. So its not like i need to worry about the future now!

Worried said...

I was at a party over the weekend and it seemed nobody was believing difficult times are coming to Finland. One lady said her company had 95% of the world market for a particular product - which i have to say is enormously impressive. Obviously Finns are World class in many areas.

One person told me though that 100% Mortgages are 'definately no longer being given'.

HousingFinland said...

Thanks Worry for your comments.

First Faber is one of the gloomiest commentators with Roubini. It's a niche market they seem to dominate and most probably generate millions out of it... So these are not my reference, but like to hear what they have to say as some time they provide some useful indication.

Second, even in the collapse of the beginning of the 90's, some company were doing very well. Take tthe example of technology company that had their best opportunities during the beginning of the 90's to culminate in the beginning of the century.

Today, competition is much tougher with Asian economy doing very well and challenging competitors.

I think they were in some cases giving more than 100% mortgage as usually they were adding up cars, boat and moto bikes on top of "variable rate" mortgages.

Credit is still expanding fast, people haven't yet changed their habit. The psychology is hard to change after years of credit binge.

It is true that banks are now scared of a fast deterioration of the global economy. If such thing were to happen, more and more company will have to reduce capacity thus pushing unemployement higher and with it higher default.

Banks profit peaked beginning of this year and will go for long slide at least for the 2-3 years until the global economy goes back to full steam.

Now, it's not about a bank that don't want to lend it's about people unability to afford startospheric housing prices with ever increasing interest rates ...

So here I agree with Anton, prices will fall maybe until 2010 or further depressing even more the economy.

Another important element is the wood duties battle where the outcome will be known next year. The result will be as worse as the russian collapse of the debt default of the 90's... this will only accelerate the fall in prices even further.

Remember one thing: Prices always overshoot upward during a boom and downward during a recession.

Worried said...


Its in the papers now!

"Buyers market...negotiate your own price"

Roubini has been shown to be consistantly overly optimistic with his gloomy predictions - you cant argue with that i think? Faber is way or another....I dont think you can argue with that really surely?

Are you suspecting that Finnish Banks will go bust in this??

The Russian situation is not so fragile i think? Commodities have soared. Be it wood or oil.

Down the pub they tell me that Putin owns Luke oil. There is plenty of money in russia at the moment it seems?

worried said...

More newspaper talk here today of Vantaa area north of Helsinki having mortgage problems and credit card problems in helsinki

Also talk of more families going to income support.

Meanwhile Konecranes announces one of their biggest ever crane orders for a company in St Petersberg.

HousingFinland said...

Hi Worried,

Regarding the mortgage or credit issue, I'm very surprised that default are not rising. I have not a clear explanation expect that debt can fuel more debt i.e people living on credit.

I know for sure that banks are adding up more debt (car, travel, electronics etc...) to the housing loan so consumer are still enjoying, pretty low interest rates as they take a very small margin on that in the order of 0.3%: so interest rates is still hoovering around 5% when in normal time credit purchase should have an interest at around 9%-12%.

So indeed banks are participant in this credit binge - in Finland - , I guess they want a remake of what happened in the late 80's

Another point, since most of the mortage rates are taken on variable rates, it means that in the past 5 years, the loan servicing could have been multiplied by 3 or by 300%.

The only explanation on why default have not risen dramatically could be because the lenght has drastically increased between 25-30 years in most cases (thus for most people they will really own their property, at best, when they retire so most of their active life they will be renters to the banks.), the other possibility is that nowdays husband and wife are working in order to service the debt so pushing more children in daycare and increasing the active population at a time of mass retirement.

In any case this perfect scenario, having very little default rely on the continued growth of the global economy. Would the global economy continue to slowdown or got into a recession then a 1991 scenario will not be totally ruled out: as the chain of default will push banks into their knee especially the smaller banks and on the way loan for housing will dry out thus pushing even more lower the price of housing.

2009 will be the year of the slowdown. Now what people need to watch is the magnitude of the slowdown...

Regarding Russia, at the moment, the economy is overheating, inflation is running at double digit so is money supply. How long can they handle, not all citizen are protected against this inflation? and about oil?? well if in 2009 the global economy slows drastically then oil price will certainly be divided by 2 ...

Regarding Faber, I think he lives in vietnam, over there the stock market lost 60% of its value and the economy is slowing sharply. I think the only good guess that Faber made was about gold..maybe he foresaw a possibility of the U.S. falling into a deflationnary environment as the one witnessed in the 30's....

Worried said...


Certainly the die is more or less cast now for a pretty difficult few years ahead.

I catch CNBC india most mornings and the fear is really there now. People talk about Asia saving the day but they have no idea of what is happening. Faber lives in Thailand i think and they are on the ropes too.

Back home 22 finance companies have failed in NZ in the last two years, House prices are moving down but otherwise nothing terrible has so far happened:-)

The UK seems perched upon an abyss. Italy Spain Ireland Estonia and so forth already have issues.

The way things are developing I think this is going to be front page news in a few weeks - even in Finland!

Anonymous said...

Re: your comment on lengthening loan periods.

My last loan (late last year) was such that there is a fixed monthly repayment, so if the interest goes down the loan repayment time is shorter, and if it goes up it becomes longer.

This means that even if interest rates rise I do not need to find any extra money to pay the monthly amount. [This only works as I did not take out 100% loan and went for a quick payback time so there was plenty of cushion.]

If many of the loans adjust like mine then in the short term the risk of default seems to be reduced, at least until the effects of inflation filter through to make it hard to make the current monthly payments.


Worried said...

Sweden and ECB raise rates.

Both saying that inflation pressures are building. Trichet quoted in Die Zeit as saying inflation could 'explode'.

Meanwhile ECB taking in mortgages etc in potentially highly inflationary type move since the securitization market is more or less dead and gone perhaps for years to come. The ECB cannot indefinately supply the market at rates below what the market is demanding.

Meanwhile if you want money you have to compete with others who want money with few wanting to lend when assetts are declining.

Seems to me that this thing is now like a ship that cannot be stopped any time soon.

Once Nordic banks get into difficulties then rates will jump as low margin competition gets replaced with high margin survival because they will have to stop building market share and prepare for harder times. Their is the notion amongst bankers in Finland that 'we are in the ECB now and that stuff from the 1990's cant happen again'. Hmmmm.

Icelandic banks have been warned by the CB to find foreign money. But where will they find it? Perhaps Iceland will become a defacto part of Norway?

Mortgage rates are likely to double from their lows of the last years and who knows just how high they will go? Banks will have to rebuild their balance sheets from the current imprudent levels at a time of what amounts to peak debt for this cycle/decade/century/lifetime. Take your pick depending on you see it.

Please argue a case that this is not going to happen.

worried said...

Preliminary debt stats released today.

looking at the english version from finish statistics it seems the graph is incorrectly drawn with wrong percentage scale??